He went on to argue that a stock at a low price relative to its earnings history was an investment, while the same stock trading at a much higher price became a speculation.

Put simply: Price matters.

Added Graham:

“For investment, the future is essentially something to be guarded against rather than to be profited from…. Speculation, on the other hand, may always properly — and often soundly — derive its basis and its justification from prospective developments that differ from past performance.”

But defining the terms more rigorously isn’t easy, as Graham and Schwed both admitted.

You might think investing requires a long-term holding period or a stream of internal cash flows. As I pointed out in my column, however, you could hold raw land for a half-century and never earn any income from it. Most people probably wouldn’t regard that as entirely speculative, especially if someone buys the land from you decades later for much more than it cost you. But what made it an investment?

Amazon.com’s stock has almost never been cheap enough to meet the conventional definitions of an investment, and it doesn’t pay a dividend. So does that make you a speculator if you buy it and hold it? No, argues long-time Amazon holder James Anderson, head of global equities at Edinburgh, Scotland-based Baillie Gifford & Co., which manages about $186 billion.

Your time horizon as a holder, says Mr. Anderson, can change how a company is run. At Amazon, he says, large numbers of patient long-term investors have supported “profit deferral” at the company, enabling “ventures to be made that would otherwise not happen as productively.”

In other words, Amazon boss Jeffrey Bezos can dream big, knowing that not all his investors are itching for immediate profit growth. If all of Amazon’s holders were speculators instead, says Mr. Anderson, it would be harder for the company to think long-term.

The key distinction, believes Harindra de Silva, president of Analytic Investors of Los Angeles, which manages about $17 billion, is that an investor calculates expected value: weighing how much you will make if you are right against how much you will lose if you are wrong.

If we flip a fair coin and I offer to pay you $200 if it comes up heads and to charge you $100 if it comes up tails, that has a positive expected value of $50 to you:

“If you make a bet with a negative expected value, like, say, playing roulette, then you’re speculating,” says Mr. de Silva. “Even if you hit the jackpot, that doesn’t make it an investment.”

He adds, “If the expected value is positive over the range of all possible outcomes, that’s an investment. But you have to do the work in order to be able to say it has a positive expected value.”

In short, if you have only asked how much will make if you’re right, but not how much you will lose if I’m wrong, then you are speculating, not investing. You can make money buying lottery tickets. But you can’t call it investing.

None of this makes speculation inherently bad. Without speculators, whom would investors buy from or sell to? How would risks get transferred quickly and cheaply from those who don’t want to bear them to those who do?

As Chief Justice Oliver Wendell Holmes of the U.S. Supreme Court wrote in 1905:

“People will endeavor to forecast the future, and to make agreements according to their prophecy. Speculation of this kind by competent men is the self-adjustment of society to the probable….”

Graham warned in his 1949 book The Intelligent Investor that the single most “unintelligent” thing you can do is “speculating when you think you are investing,” since the resulting losses can shock you out of participating in the market at all.

To manage that risk, he advised:

“put aside a portion — the smaller the better — of your capital in a separate fund for this purpose. Never add more money to this account…. Never mingle your speculative and investment operations in the same account, nor in any part of your thinking.”